Republicans move on tax reform; Fed officials see economic threats

The U.S. flag flies in front of the Capitol Dome. REUTERS/Joshua Roberts

By David Morgan

WASHINGTON (Reuters) - Congressional Republicans moved to hasten an overhaul of the U.S. tax code on Thursday, while Federal Reserve officials warned in rare public remarks that President Donald Trump's tax plan could lead to inflation and unsustainable federal debt.

In a procedural step forward, the Republican-controlled House of Representatives approved by a 219-206 vote a fiscal 2018 spending blueprint to help advance an eventual tax bill. The blueprint contains a legislative tool that would let Republicans pass a tax bill by a simple majority vote in the Senate, where they hold 52 of 100 seats, allowing them to bypass Democrats.

Separately, the Senate Budget Committee approved its own budget resolution and sent it to the full Senate for a vote, expected after Oct 16.

Trump and top Republicans in Congress hope to enact a package of tax cuts for corporations, small businesses and individuals before January, pledging that sharply lower taxes will boost U.S. economic growth, jobs and wages.

Wall Street rose on the steps taken, with major market indexes rising to record high closes again on Thursday as investors warmed to the notion that a sweeping tax overhaul could be in place by the first quarter.

"It sounds like they're serious about drafting tax reform legislation and that gives everyone greater confidence that this might actually happen," said Phil Orlando, chief equity strategist at Federated Investors in New York. He predicted tax reform could lift economic growth and corporate earnings for 2019 and send the benchmark S&P 500 <.SPX> index above 3,000. The index on Thursday finished at 2,552.07.

But Federal Reserve officials questioned the rosy Republican scenario, saying that proposed tax cuts could deliver a short-term growth surge but also bring high inflation, burdensome government debt levels and an eventual return to sub-par economic growth.

Unless targeted to raise productivity and underlying potential, San Francisco Fed President John Williams said a tax cut could feed "unsustainable" growth that would ultimately be undone by asset price bubbles, inflation and possible recession.

Fed officials generally refrain from commenting on fiscal policy. But the Trump administration is proposing up to $6 trillion in personal and corporate tax cuts at a time when many economists feel the country does not need massive stimulus.

DEMOCRATS SAY IT BENEFITS THE WEALTHY

The procedural actions in Congress set the stage for a possible clash among Republicans that could delay consideration of a bill. While the House budget prohibits tax reform from adding to the deficit, the Senate's version would allow tax legislation to lose $1.5 trillion in revenue over a decade. Republicans claim tax reform would reduce the deficit in years beyond a decade.

House and Senate Republicans must iron out their differences and approve the same budget resolution before it can provide Republicans the legislative advantage requiring only a simple majority vote in the Senate known as reconciliation.

The criticism from the Fed was only the latest to hit the Republican plan.

Democrats have assailed it as benefiting the wealthiest Americans while raising taxes on the middle class and cutting spending on social programs, including the Medicare and Medicaid healthcare programs for senior citizens, the poor and the disabled.

Republican lawmakers are also questioning a proposal to help pay for tax cuts by eliminating popular tax deductions. Some Republican fiscal hawks have warned they will not back a tax reform package that adds to the deficit.

The Trump tax plan would add about $2.4 trillion to the deficit over the next decade, said the nonpartisan Tax Policy Center, a Washington think tank, at a time when the national debt already exceeds $20 trillion.

"Where is all that money coming from?" Representative John Yarmuth, the top Democrat on the House Budget Committee, asked on the House floor. "If you're listening to this and you're not a millionaire, probably from you."

In the Senate, Democrats sought to hamstring the Republican budget resolution with amendments that would prevent tax legislation from benefiting the wealthy, raising taxes on the middle class and adding to the deficit. But Republicans successfully turned aside the effort by voting the measures down.

Democrats also called for an end to reconciliation, the legislative procedure that would sideline them in a Senate vote.

(Additional reporting by Howard Schneider in St Louis, Ann Saphir in Austin, Texas, and Herb Lash in New York; Editing by Kevin Drawbaugh and Leslie Adler)